Author Topic: Rent or Sell?  (Read 1791 times)

Roboturner

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Rent or Sell?
« on: June 14, 2017, 09:16:40 AM »
So we have a small 2 bed 2 bath single family in a desirable neighborhood - Currently we owe ~200k on the mortgage and could probably sell the house for ~425k-450k (bought in 2013 for 315k). The home is kind of perfect for renters, and our neighbors on both sides rent theirs.

 Rent would likely fetch ~2300-2500/mo so the '1%' rule would work if you only considered the remaining mortgage of 200k, but wouldn't for 425 or even 315. Cash flow after mortgage would be $1k-1.2k/mo

Is there a good way to think about whether or not we should rent? Our interest rate on the mortgage is super low, so paying extra doesn't make sense in this climate. Should I consider the equity as sunk cost and consider 2.4k rent vs. 200k debt? Any thoughts on what makes sense here - working under the assumption that the equity in the current place isn't necessary to fund a different house (we don't "need" it).

Let's say (optimistically) we can walk with 200k after sale, the 4% rule implies a cash flow of $667/mo. Taking 10 mo/year of 2500/mo (taking 2 months of rent as vacancy and repairs in this situation) would be 25,000/year less 12 months of mortgage ($15600/year) would imply a cash flow of $783/mo.

$783>$667 - so renting makes sense? Am i think about this the right way?

lakesandmountain

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Re: Rent or Sell?
« Reply #1 on: June 14, 2017, 10:50:39 AM »
Sure, I can think of a few complicating factors. First, on the negative cash flow side of renting, you would be on the hook for property taxes, insurance, HOA (if applicable), and some utilities.

Second, on the positive side for renting (but not easily fitting into the cash flow category), your equity would grow as the tenants pay your mortgage. Consult your amortization table to see exactly how much of a boost that is per month, but it should be appreciable. Also something to consider: depreciation of your rental house could have big tax advantages--essentially a low interest loan from Uncle Sam.

Third, a toss up: holding on to the property means its value for when you do eventually sell it could go up or could go down. A difference of 20k over a few years is plausible and would skew your calculations. But who knows what will happen?

Lastly, renting is a pain in the neck. I don't know your circumstances, but $2500 seems less than automatic. A lot of people are priced out near that point or prefer a 3 br, etc. Also, plenty of paper work, effort to find tenants, broken water heaters, noise complaints, and other non-autopilot stuff.

Bottom line, there's plenty to consider beyond immediate monthly cash flow. Renting is likely to be a lower cash flow option in the near term factoring in the various upkeep costs, but could see some larger lump sum gains later on.

waltworks

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Re: Rent or Sell?
« Reply #2 on: June 14, 2017, 01:46:09 PM »
You'll lose your capital gains exemption if you rent it for more than a couple of years, remember.

I'd sell it. But that's just me. Rentals are stressful and risky, and you've not accounted for:
-Vacancy when finding tenants/new tenants
-Maintenance - tenants will expect things to be fixed ASAP in a higher end rental.
-Management - if you choose to self-manage, figure out how much time you'll be putting in and how much you want to make an hour.
-Marketing - if needed to find good tenants, this sometimes costs a bit.

I'd guess if you added those all up you'd end up with $500-700 of cash flow a month.

Remember also that comparing to the 4% rule is a little silly - the 4% rule is an amount that you can draw and *expect to end up with more money than you started* in the stock market. If you're comparing to stocks, you should use a return more like 7% (after inflation, dividends reinvested), which would be about $14k/year on your $200k.

-W

adamcollin

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Re: Rent or Sell?
« Reply #3 on: June 20, 2017, 03:44:36 AM »
Selling your home doesn't sound like a good option.

Cwadda

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Re: Rent or Sell?
« Reply #4 on: June 21, 2017, 09:00:05 AM »
Quote
Cash flow after mortgage would be $1k-1.2k/mo

Woah woah woah, hold up there. Cash flow is NOT rent minus mortgage. You have to account for vacancy, property management, HOA fees (if applicable), property taxes, insurance, repairs, capital expenditures, and anything else that goes into home expenses.

My best advice would be to plug in all of this information into the attached calculator and see what you come up with for cash flow and cash-on-cash return. THEN decide whether it's better to rent out or sell. :)


Roboturner

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Re: Rent or Sell?
« Reply #5 on: June 23, 2017, 03:50:25 PM »
Quote
Cash flow after mortgage would be $1k-1.2k/mo

Woah woah woah, hold up there. Cash flow is NOT rent minus mortgage. You have to account for vacancy, property management, HOA fees (if applicable), property taxes, insurance, repairs, capital expenditures, and anything else that goes into home expenses.

My best advice would be to plug in all of this information into the attached calculator and see what you come up with for cash flow and cash-on-cash return. THEN decide whether it's better to rent out or sell. :)

Thanks for the cashflow xcel, it's pretty neat, and yes, im aware true cashflow is not 1-1.2k (i shouldve put "cash" in quotes) the second scenario i wrote came out to $783. Using the cashflow sheet and our actual taxes and insurance quote shows inline at $743.

Goldielocks

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Re: Rent or Sell?
« Reply #6 on: June 24, 2017, 02:55:35 PM »
$2500 for all repairs seems quite low, for a whole home, as you need to always assume 1 month of vacancy, at least, and have only allowed $5k total.  I note that you have not allowed for property management or the value of your own time, either.. you should add at least another $750/year cost value for your own time, in my opinion.

The 1% rule is on the whole home price, for a good reason, and you have maybe 0.5% before adding the missing costs. 

The only reason to keep it is if you expect rapid capital asset increases, or you are holding the home in case you want to move in, in a couple of years.   Otherwise is it higher risk and lower return than most other investments right now.